Possible AmGeneral disposal may lower AMMB profit

This article first appeared in The Edge Financial Daily, on December 6, 2018.
-A +A

AMMB Holdings Bhd
(Dec 5, RM4.25)
Maintain hold with an unchanged target price (TP) of RM4.10:
AMMB’s possible divestment of AmGeneral Insurance (AI) came as a surprise to us as there are synergies between AI and its banking units. Although the possible divestment could lead to a one-off divestment gain, it could reduce AI’s earnings contributions to AMMB in the longer term. We retain our “hold” call due to the upturn in credit cost cycle.

Yesterday, Bloomberg reported that Allianz Malaysia and Mitsui Sumitomo Insurance have been shortlisted to proceed to the next round of bidding for AI. It was stated that the deal could value AI at about US$800 million (RM3.32 billion). AMMB owns 51% of AI, while Insurance Australia Group holds the remainder.

We are surprised by the above as AI is one of AMMB’s key earnings contributors. Furthermore, there are synergies between AI and its other banking entities.

AI’s shareholders’ funds stood at RM1.64 billion as at Sept 18. The quoted selling price of RM3.3 billion translates into a price to book value ratio (P/BV) of two times. This is reasonable as it is below the average P/BV of 2.3 times for the previous insurance mergers and acquisitions in Malaysia.

We estimate that AMMB would book in a one-off divestment gain of RM644.6 million from the sale based on (i) the assumed selling price of RM3.3 billion, (ii) assumed tax rate of 24%, and (iii) AI’s shareholders’ fund of RM1.64 billion at Sept 18. We also assume that the value of AI in AMMB’s book is equivalent to AMMB’s 51% share of AI’s shareholders’ funds.

The divestment gain could push up AMMB’s FY20F (forecast) net profit by 45.4%, if the sale materialises.

We estimate that AI contributed about 9.2% to AMMB’s net profit in FY18F. In this case, the sale of its stake in AI could trim AMMB’s FY20-FY21F net profit by 9% to 10%.

Despite the attractive dividend yield of 4.3% projected for FY19F, we retain our “hold” call on AMMB due to the upturn in credit cost cycle.

The possible divestment in AI would not alter our call as despite the potential one-off divestment gain, it will cut AI’s earnings contribution to AMMB. We prefer RHB Bank.

Our FY19-FY21F earnings per share forecasts and dividend discount model-based TP price of RM4.10 are intact.

Potential upside or downside risks are pickup or deterioration in loan or fee income growth. — CGSCIMB Research, Dec 4